I’m a biologist. I could talk for hours about what’s going on at the molecular level during meiosis I in fruit fly ovaries. In fact, I’m writing this while I should be writing a half hour talk I’m giving next week on that exact subject. I can talk science through and through. But one of the few subjects I’ve never been able to wrap my head around is economics. My brain just doesn’t work.
I want to get a basic idea of how exactly the stock market works. Well, I mean, I get the whole buying and selling and trading stocks thing. It’s more about how companies benefit from stock trading.
So, I get the basic idea of stock. I own SmegCo, a company I set up to manufacture and sell something or other. Because I started it, I own all of it. One day, I decide that I want to raise some money to expand my business and make it way better, so I sell off shares of stock. Each share you own means that you own some small percentage of SmegCo, and SmegCo pays out some part of its profits as dividends to each shareholder. Right so far? I think so.
Now, the value of shares is determined (more or less) by supply and demand. The supply is essentially constant, since I can only sell up to 100% of my company, so demand is what controls the value. The better my company is doing, the more profit it makes, and the higher the dividend, so the more demand there is for shares in SmegCo. So prices go up and down depending on how well my company is doing.
But here’s the part I don’t get. I can see the value to the company in the initial sale of stock - it brings in a lot of money that I can use to make the company better. But it seems that a whole lot of time and effort is spent keeping stock prices high, as an end goal in itself. Once the shares are sold, how does the company benefit from people trading those shares around amongst themselves? If my mom owns 20 shares and sells them to Cecil Adams, does the price of that transaction matter at all to SmegCo? None of the money goes to the company, does it? So why does the company care? You hear a lot of “making the shareholders happy” talk, which I sort of get - they own the company, after all - but why is it such a disaster if share prices tank, for instance? It may affect individuals within the company that own stock as the perceived value of their possessions drops, but it’s not like people are breaking in and stealing money from SmegCo’s accounts…
I’m not sure if my question is clear enough yet, but I’ll throw it out there and see what I get back.